In Memoriam
David Swensen (honorary ’64)
David Swensen was an honorary member of the Class of 1964. Here is his obituary.
David Swensen, Who Revolutionized Endowment Investing, Dies at 67
At Yale, a colleague said, he showed “there was a way to compete hard and well in financial markets, but to have our lives be about something that mattered more.”
The New York Times
May 6, 2021
David Swensen, a money manager who gave up a lucrative Wall Street career to oversee Yale University’s endowment and proceeded to revolutionize endowment investing, in the process making Yale’s the best-performing fund in the country over a 20-year period, died on Wednesday in New Haven, Conn. He was 67.
His wife, Meghan McMahon, said the cause was kidney cancer, which he had since 2012. He died at Yale New Haven Hospital.
Mr. Swensen’s innovation at Yale was to shift endowment investing from a formulaic menu of stocks and bonds to a portfolio that included hedge funds and even timberlands. When he took over at Yale in 1985, the endowment was worth $1.3 billion. Since then it has grown to $31.2 billion, passing those at both Princeton and the University of Texas and trailing only Harvard University’s.
Mr. Swensen was particularly proud of how the growing endowment had helped the university contribute to financial aid.
“One of the things that I care most deeply about is that notion that anyone who qualifies for admission can afford to go to Yale, and financial aid is a huge part of what the endowment does,” he said in an interview for this obituary in 2014.
It also meant a great deal to him that in 2013, a year after he received his cancer diagnosis, 90 colleagues, friends, and family members had raised $35 million in his honor — gifts that were invested in the Yale endowment.
Mr. Swensen’s investment strategy became known as the “Yale model” and was imitated by other colleges and universities. A number of them, including Princeton, the Massachusetts Institute of Technology, and Bowdoin College in Maine, were quick to hire his protégés, many of whom were also courted by Wall Street, where they could have easily made a fortune.
Mr. Swensen’s returns rivaled and even exceeded those of many of the world’s great hedge-fund managers, and he could have earned tens of millions, even hundreds of millions, in the private sector. But he resisted that lure, his brother Dr. Stephen Swensen said in an interview in 2014.
“He has never had any interest in doing anything but running the endowment as well as he could,” Dr. Swensen said. “He has a passion for giving back to an institution with a higher purpose. He never aspired to more money or a higher position.”
Mr. Swensen’s disciples often eschewed Wall Street as well. Andy Golden, who runs Princeton’s endowment, said that Mr. Swensen had “inspired people the same way he attracted them.”
“He showed that there was a way to compete hard and well in financial markets,” he added, “but to have our lives be about something that mattered more.”
Mr. Swensen began his professional career on Wall Street, working three years at Lehman Brothers and three at Salomon Brothers. At Salomon he structured the first currency transaction known as a swap, involving IBM and the World Bank. But he was willing to leave that world behind when Yale approached him about taking the endowment job, even though it meant accepting an 80 percent pay cut.
For Mr. Swensen, endowment management seemed as much a calling as a career. When endowment managers used that post to burnish their résumés, he privately fumed that they had betrayed a trust to education.
“When I see colleagues of mine leave universities to do essentially the same thing they were doing but to get paid more, I am disappointed, because there is a sense of mission,” he said in an interview with The New York Times in 2007. “People think working for something other than the most money you could get is an odd concept, but it seems a perfectly natural concept to me.”
David Frederick Swensen was born on Jan. 26, 1954, in Ames, Iowa, and grew up in River Falls, Wis. His father, Richard, was a chemistry professor at the University of Wisconsin-River Falls and then dean of its College of Arts and Sciences. His mother, Grace (Hartman) Swensen, became a Lutheran minister after raising their six children.
Finance fascinated the young Mr. Swensen, who got his undergraduate degree at River Falls (as did all of his siblings and his mother) and a doctorate in economics at Yale, where he was deeply influenced by the Nobel laureate James Tobin, a proponent of reducing volatility in investing through broad diversification.
Mr. Swensen began putting that approach into the Yale portfolio soon after taking over as the university’s chief investment officer in 1985. In the 2014 interview, he recalled that when he arrived, alternatives like real estate and venture capital represented just a tiny percentage of the endowment. Hedge funds did not exist as an asset class.
“A combination of common sense (don’t put all your eggs in one basket) and finance theory (diversification is a free lunch) caused me to improve the diversification of Yale’s portfolio,” he said. “An understanding of the long-term nature of endowment investing caused me to increase the equity exposure of the fund.”
There is some debate in the academic world as to whether he was the first to diversify. But there was little doubt that he was the best at it.
In 2000, Mr. Swensen laid out his theory in the book Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment. It became required reading at some business schools.
His research was prodigious. Before he put money into Chieftain Capital Management, for example, he called the chief executives of some of its largest holdings and asked them, “Who really knows your company well?”
“No other investors did research like that,” said Glenn Greenberg, a Chieftain founder.
Mr. Swensen was never cowed by hedge-fund managers with great track records. He declined to invest with Steven Cohen, the manager whose hedge fund closed after some of his traders were convicted of insider trading, because Mr. Cohen (who is now the majority owner of the New York Mets) took 50 percent of the profits in fees. And he refused to invest in ESL Partners, run by Edward Lampert, when Mr. Lampert would not identify the companies in which he was investing. In the investment world, many managers vied to attract Yale’s money.
In the wake of the financial crisis of 2008, Mr. Swensen was appointed to President Barack Obama’s Economic Recovery Advisory Board. But his seemingly foolproof strategy was called into question during that crisis, when the Yale endowment’s heavy investment in illiquid assets put pressure on returns, resulting in a 24.6 percent loss.
Other universities that had followed his model also suffered. With a significant part of their portfolios in illiquid assets, some were forced to sell off those holdings at a loss in order to raise cash.
For a time Mr. Swensen’s strategy was widely criticized; analysts suggested that a simple mix of stocks and bonds would have been better. But he remained convinced that over the longer term, wide diversification was the right strategy. He was proved right in 2014, when Yale led the industry with a 20.2 percent return.
Over 20 years the endowment had a 9.9 percent annualized return. Over the 10 years ending on June 30, 2020, it was the third-best performer among the nation’s largest university endowments, according to Charles Skorina, whose firm recruits chief investment officers. The other three, Bowdoin, Princeton and the M.I.T., were all led by Yale alumni.
In addition to running the endowment, Mr. Swensen relished teaching his undergraduate class on investment analysis with his longtime friend and colleague Dean Takahashi; he taught the final class of his 35th year on Monday. Ms. McMahon, his wife, recalled him frequently quoting his mentor James Tobin as saying: “I love teaching Yale undergraduates. I never fail to learn from them.”
Other money managers joining universities sought Mr. Swensen’s advice. He always suggested that they keep their offices on campus if possible, and he was sensitive to matters that students brought up, like climate change. Students have continued to push Yale to take a stronger stand on the issue.
Mr. Swensen acknowledged that greenhouse gas emissions posed a grave threat and asked managers to consider the financial risks of climate change, particularly if the government imposed carbon taxes. The investment office recently estimated that 2.6 percent of the endowment is invested in fossil fuel producers, a multi-decade low, and that it expects that decline to continue.
In 2018, Mr. Swensen said Yale would not invest in outlets that sell assault weapons. Most recently he encouraged endowments to hire more women and members of minorities.
Over the years he was a trustee or adviser to a host of institutions, including the Brookings Institution, the Carnegie Corporation, the Courtauld Institute of Art, the Chan Zuckerberg Initiative and the states of Connecticut and Massachusetts.
Mr. Swensen’s first marriage, to Susan Foster, ended in divorce. In addition to Ms. McMahon, he is survived by three children from his first marriage, Alexander Swensen, Timothy Swensen and Victoria Coleman; his mother, Grace; two brothers, Stephen and Daniel; three sisters, Linda Haefemeyer, Carolyn Popp, and Jane Swensen; and two grandchildren. He lived in Killingworth, Conn.
Mr. Swensen was as concerned about the small investor as he was about his endowment. In his book Unconventional Success: A Fundamental Approach to Personal Investment (1995), he advised people to keep their costs low and to stick to exchange-traded funds, which invest across an entire index of stocks, rather than investing with money managers or mutual funds that select individual stocks, and where the costs can erode profits. It was virtually impossible for the average investor to get into the best private funds, he said.